Understanding Liquidity Management Topic11

Understanding Liquidity Management

A visual guide to the tools and strategies companies use to manage their cash flow effectively, ensuring financial stability and maximizing the use of available funds.

Fundamental Tools

Primary Point: Basic Account Management

These are the simplest forms of liquidity management, often used by both individuals and businesses.

Sub-points:

• Credit Interest: Earning money from the balance held in an account. PSPs may offer tiered rates to attract more deposits.
• Overdraft: A short-term credit line allowing payments even with a zero balance. It's intended for temporary use due to higher interest rates.

Daylight Overdrafts

Primary Point: Intraday Liquidity

A temporary overdraft within a single business day, primarily for corporations to manage payment timing mismatches.

Sub-points:

• Facilitates Payments: Allows companies to make crucial payments (like salaries) early in the day before incoming funds have cleared.
• Must Be Cleared: The negative balance must be covered by incoming funds before the close of business to avoid becoming a standard overdraft.
• Monitored Closely: Central banks like the U.S. Federal Reserve monitor and may charge for heavy usage of these facilities.

Zero Balance Accounts (ZBA)

Primary Point: Cash Concentration

Automates the process of consolidating funds from multiple subaccounts into one main (header) account.

Sub-points:

• End-of-Day Process: At the close of business, any balance (positive or negative) in a ZBA is physically moved to the header account, zeroing it out.
• Simplifies Management: Eliminates the need for manual transfers and provides a clear view of the total cash position in one place.
• Best for Single Entities: Works best within a single legal entity to avoid tax issues related to intercompany loans.

Sweep Structures

Primary Point: Flexible Fund Movement

A more flexible version of ZBAs where fund movements are automated but not necessarily to a zero balance.

Sub-points:

• Target Balance: Companies can set a "target balance" to leave a specific amount in the subaccount.
• Variable Timing: Sweeps can occur daily, weekly, or when a certain balance threshold is reached.
• Two-Way Sweeps: Funds can be automatically moved back and forth between accounts to meet anticipated cash needs at different times.

Notional Pooling

Primary Point: Balance Offsetting

A powerful tool that allows a company to offset debit and credit balances across multiple accounts without any physical movement of cash.

Sub-points:

• No Physical Transfer: Interest is calculated on the net balance of all accounts in the pool, reducing overdraft interest costs.
• Handles Multiple Entities: Ideal for groups with different legal entities, as it avoids creating intercompany loans and related tax issues.
• Regulatory Limits: Not permitted in all countries (e.g., the USA). Can be single or multi-currency.

Advanced Solutions

Primary Point: Efficiency and Reconciliation

Modern structures that streamline payment processes and enhance information reporting for complex organizations.

Sub-points:

• POBO/ROBO: "Pay/Receive On Behalf Of" schemes where one entity manages all payments and receipts for multiple subsidiaries, centralizing treasury operations.
• Virtual Accounts: Sub-ledger accounts linked to a single physical bank account. They provide enhanced reporting and segregation of funds without the need for numerous physical accounts or sweeps.